Experienced landlords build wealth and use every tax benefit the government allows. The U.S. tax code has many rules that allow rental property owners to save money and reduce their taxes. But to take advantage of tax deductions, you need to know what they are and understand how to use them.
If you need further help, please contact a tax professional, attorney, or CPA.
What qualifies as an expense?
There are two types of expenses: current expenses and capital expenses.
These are generally one-off items that help keep the property in good working condition and habitable, or items that help you operate your rental business.
You can deduct the entire expense from your taxes in the same year it was incurred—why it’s called a “current” expense. In general, repairs are expected to restore an item to its previous working condition.
Here’s what necessary to qualify as a current expense:
It must be ordinary and necessary.Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.
It must be current. Current expenses must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the appliance has long-term value.
It must be directly related to your rental activity. The expense must be business related.
It must be reasonable in amount. If you claim to have paid $500 for a toilet seat, you will get audited.
Anything that increases the value of the property or extends its life is categorized as a “capital expense” or “improvement” and must be capitalized and depreciated over multiple years.
You should probably deduct as a capital expense any item that costs hundreds of dollars (or more) to replace.
For a more detailed explanation and specific examples of each, learn more about the differences between repairs and improvements.
Before claiming any of these deductions, be sure to have detailed and thorough records to back them up. Track your expenses as you make them; your tax prep will be much more manageable if you stay organized throughout the year.
In Cozy, you can track your expenses and categorize them as the IRS does for free. You can take pictures of your receipts and upload them in Cozy, so they’re attached to each expense. Then download a simple expense summary report that matches the required fields on your IRS 1040 Schedule E.
The IRS scrutinizes these deductions (some more than others), so you need to be prepared if you get audited. If you fail to have proper receipts and cannot validate the business necessity of each expense, you will have to pay the amount due, with interest, if you get audited.
Top 15 tax deductions for landlords
1. Loan interest/points
If there’s a mortgage on the property, the loan interest will probably be your single largest deductible expense. Further, if you paid buy-down points on the property purchase or mortgage refinance, you can deduct those as well.
- Mortgage interest (primary and secondary)
- HELOC interest for loans used to repair or improve the property
- Credit card interest on items used for the property
- Mortgage points to purchase or refinance a rental property
Keep in mind that you can only deduct interest on money that was actually spent on your rental business. You can’t deduct the interest of a withdrawn line of credit that is sitting in your bank account.
2. Depreciation of assets
There are three types of costs you need to capitalize and depreciate:
- The value of the structure, not the land
- The value of improvements such as appliances, carpet, windows, countertops, etc.
These expenses cannot be deducted in a single year, but rather must be spread out (depreciated) over multiple years. Otherwise, people could abuse the system by claiming, for example, $100,000 in repairs in a single year to remove all tax liability and then sell the property the next year to recoup their renovation ROI.
Real estate taxes are often paid through the mortgage company, and therefore show up on Form 1098 that’s sent from the bank. If the property is free and clear of any mortgage, CONGRATULATIONS!, but you’ll have to look up your tax records online if you didn’t keep receipts of those payments. Other business-related wage taxes, permit fees, or personal property taxes are considered allowable deductions as well:
- State, county, and city taxes
- Social Security taxes for employees
- Medicare and unemployment taxes for employees
- Personal property tax/vehicle tax
- Permit fees/inspection fees
Consider paying for repairs and improvements using a separate emergency fund for each property. Repairs are defined as any effort to maintain the current condition of a property or asset.
- Painting/spot patching
- Plumbing repairs
- Air conditioning repair
- Fixture repairs
- Labor costs/contractors
- Incidentals related to a repair
- Rental fees for tools/equipment
Maintenance costs are often confused with repairs; however, with maintenance, you’re not necessarily fixing anything. For example, the lawn will always need to be cut, but it is never really “broken.”
You can also hire a pest company to treat the property every few months to prevent further infestations, even if the original pests are long gone.
- Landscaping and tree trimming
- Homeowner association fees
- Pool cleaning, chemicals, and maintenance
- Pest control and treatment
- Tune-ups on lawn mowers, chainsaws, leaf blowers, etc.
- Light bulbs
- Smoke detector batteries
- HVAC filters
- Janitorial items
6. Insurance premiums
All business-related insurance premiums are tax-deductible. When trying to decide if the insurance is business related, ask yourself whether you’d buy this insurance if you didn’t own a rental.
Also consider an umbrella policy, which covers personal assets and legal liability above and beyond the coverage on rental properties.
- Homeowners insurance
- Mortgage insurance premiums
- Fire/damage/liability insurance
- Flood insurance riders
- Theft insurance
- Workers’ compensation insurance
- General liability insurance
- Personal umbrella insurance
You can deduct the cost of any rental property utilities that you pay for. You’re still allowed to claim utility expenses even if the tenants reimburse you later, but you also have to claim that reimbursement as income.
- Heating oil
- Water and sewer
- Trash and recycling
8. Travel expenses
Many American landlords don’t live near their properties. Any long distance travel to visit your assets or to conduct rental business can be tax-deductible as a business expense.
- Airline fares
- Car rentals and taxis
- 50% of meal expenses
When expensing business vehicles, you must depreciate the actual asset over multiple years; however, you can deduct the upkeep in the year you incurred the expense. You have the option of deducting actual expenses or using a standard mileage rate.
- Business vehicles (depreciable)
- Mileage or gas/maintenance/use of business or personal vehicles
10. Management fees
Even the best landlords need help from time to time. If you hire a property manager, or even an on-site manager, you can deduct that expense.
- Property management companies
- Individual property managers
- On-site manager
- Condominium association fees
- Special assessments
11. Legal and professional fees
If you need to hire a pro, such as a lawyer, accountant, or tax professional, you can expense the cost. If you ever have to evict a tenant, you can expense all reasonable court and filing fees.
- Accounting advice
- Professional tax preparation
- Tax preparation software (like TurboTax)
- Structural engineering and consulting
- Legal fees
- Lease review and editing
- Court filing fees
12. Office/operating expenses
You have to work somewhere. Some landlords rent commercial office space. But if you work from home, you should know that a home office deduction is one of the most commonly flagged deductions by the IRS—and for good reason. Many business owners abuse this deduction, but you should use it if you conduct business in your home. Keep great records for the time you spend using that space for business, and logically subtract any personal usage.
- Ink and printer paper
- Pencils, pens, and staples
- Rental software
- Legal forms
- Rent paid for office space
- Square footage of a home office
- Phone bills
If you are still using printed rental ads, STOP! Between Craigslist and Zillow Rental Manager, you’ll cast a wider net than any newspaper ad. Cozy can help you market your vacancies online for free.
- Radio, newspaper, online ads
- Signs and banners
- Printing and postage for mailers
Some landlords offer monetary incentives to current tenants, if they find a replacement tenant upon their departure.
- Commissions to managers and salespeople
- Commissions for tenant referrals
15. Start-up expenses
Yes, you can deduct some of the expenses required to start being a landlord. Unlike operating expenses, start-up expenses cannot automatically be deducted in a single year. The maximum allowable deduction for start-up expenses in the first year is $5,000.
A $25,000 limit on losses
According to the IRS, if you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your non-passive income.
For example, pretend you had $60,000 in depreciation and expenses for a given property in a single year. That property, however, only generated $20,000 in rental income.
This leaves you with a $40,000 loss (ouch!).
You can claim $25,000 of losses that year, but then you are allowed to “recapture” the other $15,000 in losses against your income the next year. If you continue to have losses beyond $25,000 year after year, you can recapture the sum of the unused losses against the gains when you sell the property.
You can do your own taxes!
If you’re feeling adventurous, try preparing and filing your own federal taxes this year. It’s not that hard when you have the right tools.
TurboTax Home & Business is a good tool for preparing (and e-filing) federal and state taxes and all required forms.
If you still need help, consider hiring a professional.
Find a CPA or lawyer. Your state bar association will likely have a lawyer referral program to help match you with an attorney. The AAA-CPA can refer you to an attorney-certified public accountant in your city.
Official IRS guidance
IRS Form 1040 Schedule E (pdf)